Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts

Подождите немного. Документ загружается.

188188

and all other companies must carefully evaluate the “deal” (either a merger or an

acquisition) they are contemplating to verify that completing the transaction will facilitate

the ﬁ rm’s efforts to achieve strategic competitiveness and create value for stakeholders

as a result of doing so.

Sources: P. Hannon, 2009, Foreign investing decreased by half earlier this year, Wall Street Journal Online, http://

www.wsj.com, June 25; S. Jung-a, 2009, Mergers & acquisitions: Ambitious companies with war-chests look for

value, Financial Times Online, http://www.ft.com, May 20; Z. Kouwe, 2009, Deals on ice in ﬁ rst half, with 40%

drop in M.&A., New York Times Online, http://www.nytimes.com, July 1; J. Silver-Greenberg, 2009, Dealmakers

test the waters, BusinessWeek, March 2, 18–20; 2008, Global M&A falls in 2008, New York Times Online, http://

www.nytimes.com, December 22; L. Saigoi, 2008, Record number of M&A deals cancelled in 2008, Financial

Times Online, http://www.ft.com, December 22.

We examined corporate-level strategy in Chapter 6, focusing on types and levels of prod-

uct diversification strategies that firms derive from their core competencies to create

competitive advantages and value for stakeholders. As noted in that chapter, diversifica-

tion allows a firm to create value by productively using excess resources.

In this chap-

ter, we explore merger and acquisition strategies. Firms throughout the world use these

strategies, often in concert with diversification strategies, to become more diversified. As

noted in the Opening Case, even though the amount of merger and acquisition activity

completed in 2008 and through mid-2009 fell short of such activity in previous years,

merger and acquisition strategies remain popular as a source of firm growth and hope-

fully, of above-average returns.

Most corporations are very familiar with merger and acquisition strategies. For

example, the latter half of the twentieth century found major companies using these

strategies to grow and to deal with the competitive challenges in their domestic markets

as well as those emerging from global competitors. Today, smaller firms also use merger

and acquisition strategies to grow in their existing markets and to enter new markets.

Not unexpectedly, some mergers and acquisitions fail to reach their promise.

Accordingly, explaining how firms can successfully use merger and acquisition strategies

to create stakeholder value

is a key purpose of this chapter. To do this we first explain

the continuing popularity of merger and acquisition strategies as a choice firms evalu-

ate when seeking growth and strategic competitiveness. As part of this explanation, we

describe the differences between mergers, acquisitions, and takeovers. We next discuss

specific reasons firms choose to use acquisition strategies and some of the problems orga-

nizations may encounter when implementing them. We then describe the characteristics

associated with effective acquisitions before closing the chapter with a discussion of dif-

ferent types of restructuring strategies. Restructuring strategies are commonly used to

correct or deal with the results of ineffective mergers and acquisitions.

The Popularity of Merger and Acquisition

Strategies

Merger and acquisition strategies have been popular among U.S. firms for many years.

Some believe that these strategies played a central role in the restructuring of U.S. busi-

nesses during the 1980s and 1990s and that they continue generating these types of ben-

efits in the twenty-first century.

Although popular and appropriately so as a means of growth with the potential to

lead to strategic competitiveness, it is important to emphasize that changing conditions

in the external environment influence the type of M&A activity firms pursue. During the

recent financial crisis for example, tightening credit markets made it more difficult for

firms to complete “megadeals” (those costing $10 billion or more). As a result, “… many

acquirers are focusing on smaller targets with a niche focus that complements their

existing business.”

Additionally, the relatively weak U.S. dollar increased the interest of

firms from other nations to acquire U.S. companies. For example, speculation surfaced

Part 2: Strategic Actions: Strategy Formulation

Chapter 7: Merger and Acquisition Strategies

189

in mid-2009 that Singapore’s sovereign wealth fund, Temasek Holdings, was considering

acquiring the aircraft-leasing unit of insurer AIG.

In the final analysis, firms use merger and acquisition strategies to improve their ability

to create more value for all stakeholders including shareholders. As suggested by Figure 1.1,

this reasoning applies equally to all of the other strategies (e.g., business-level, corporate-

level, international and cooperative) a firm may formulate and then implement.

However, evidence suggests that using merger and acquisition strategies in ways

that consistently create value is challenging. This is particularly true for acquiring firms

in that some research results indicate that shareholders of acquired firms often earn

above-average returns from acquisitions while shareholders of acquiring firms typically

earn returns that are close to zero.

Moreover, in approximately two-thirds of all acquisi-

tions, the acquiring firm’s stock price falls immediately after the intended transaction

is announced. This negative response reflects investors’ skepticism about the likelihood

that the acquirer will be able to achieve the synergies required to justify the premium.

Premiums can sometimes be excessive, as appears to be the case with NetApp’s proposed

acquisition of Data Domain in mid-2009: “On straightforward valuation measures, the

(acquisition) price already looks in the stratosphere. At $33.50, the offer is 419 times

Data Domain’s consensus 2009 earnings, including the enormous cost of employee stock

options.”

Obviously, creating the amount of value required to account for this type of

premium would be extremely difficult. Overall then, those leading firms that are using

merger and acquisition strategies must recognize that creating more value for their stake-

holders by doing so is indeed difficult.

Mergers, Acquisitions, and Takeovers: What Are

the Differences?

A merger is a strategy through which two firms agree to integrate their operations on

a relatively coequal basis. Recently, Towers Perrin Forster & Crosby Inc. and Watson

Wyatt Worldwide Inc., two large human-resources consulting firms, agreed to merge.

Shareholders of each firm will own 50 percent of the newly formed company, which will

be “… the world’s biggest employee-benefits consultancy… .”

Even though the transaction between Towers Perrin and Watson Wyatt appears to

be a merger, the reality is that few true mergers actually take place. The main reason for

this is that one party to the transaction is usually dominant in regard to various charac-

teristics such as market share, size, or value of assets. The transaction proposed between

Xstrata and Anglo American appears to be an example of this.

In 2009, Swiss-based Xstrata (a global diversified mining group) proposed a friendly

merger with London-based Anglo American (a diversified mining and natural resource

group). While some analysts thought the proposed merger of equals “should create some

value,” they also concluded that the “… friendly merger with Anglo American (was) a

pretty aggressive bear hug” given the terms Xstrata was seeking and its potential inability

to pay the premium Anglo’s shareholders expected. In this case too some felt that Anglo’s

assets were of higher quality, reducing the likelihood that the transaction was actually

one of “equals.”

An acquisition is a strategy through which one firm buys a controlling, or 100 per-

cent, interest in another firm with the intent of making the acquired firm a subsidiary

business within its portfolio. After completing the transaction, the management of the

acquired firm reports to the management of the acquiring firm.

In spite of the situation we described dealing with Xstrata and Anglo American,

most of the mergers that are completed are friendly in nature. However, acquisitions

can be friendly or unfriendly. A takeover is a special type of acquisition wherein the

target firm does not solicit the acquiring firm’s bid; thus, takeovers are unfriendly acqui-

sitions. Research evidence showing “… that hostile acquirers deliver significantly

higher shareholder value than friendly acquirers” for the acquiring firm

is a reason

A merger is a strategy

through which two

ﬁ rms agree to integrate

their operations on

a relatively coequal

basis.

An acquisition is

a strategy through

which one ﬁ rm buys

a controlling, or 100

percent, interest in

another ﬁ rm with

the intent of making

the acquired ﬁ rm a

subsidiary business

within its portfolio.

A takeover is a special

type of acquisition

wherein the target ﬁ rm

does not solicit the

acquiring ﬁ rm’s bid;

thus, takeovers are

unfriendly acquisitions.

190

Part 2: Strategic Actions: Strategy Formulation

some firms are willing to pursue buying another company even when that firm is not

interested in being bought. Often, determining the price the acquiring firm is willing

to pay to “take over” the target firm is the core issue in these transactions. In July 2009,

for example, Exelon “… raised its hostile bid for rival power producer NRG Energy to

nearly $7.5 billion in stock, marking the latest twist in the months-long takeover feud.” At

issue was NRG’s position that Exelon’s bids were inadequate. At the same time however,

NRG “… said that it remained open to a deal at a fair price.”

On a comparative basis, acquisitions are more common than mergers and takeovers.

Accordingly, we focus the remainder of this chapter’s discussion on acquisitions.

Reasons for Acquisitions

In this section, we discuss reasons firms decide to acquire another company. Although

each reason can provide a legitimate rationale, acquisitions are not always as suc-

cessful as the involved parties want to be the case. Later in the chapter, we examine

problems firms may encounter when seeking growth and strategic competitiveness

through acquisitions.

Increased Market Power

Achieving greater market power is a primary reason for acquisitions.

Defined in Chapter

6, market power exists when a firm is able to sell its goods or services above competi-

tive levels or when the costs of its primary or support activities are lower than those

of its competitors. Market power usually is derived from the size of the firm and its

resources and capabilities to compete in the marketplace;

it is also affected by the firm’s

share of the market. Therefore, most acquisitions that are designed to achieve greater

market power entail buying a competitor, a supplier, a distributor, or a business in a

highly related industry to allow the exercise of a core competence and to gain competitive

advantage in the acquiring firm’s primary market.

If a firm achieves enough market power, it can become a market leader, which is the

goal of many firms. For example, having already acquired Gateway and Packard Bell (see

the Strategic Focus in Chapter 4), Acer is contemplating acquiring other firms (perhaps

Asustek of Taiwan or Lenovo of China) as a means of getting closer to its goal of being

the leading maker and seller of personal computers.

Vertu, already the ninth-largest

motor retailer in the United Kingdom, recently acquired some of the businesses and

assets of Brooklyn Motor, a Ford and Mazda dealership. The transaction provided Vertu

with its first Mazda franchise and facilitated the firm’s intention of increasing its share of

its core market in the Worcestershire area.

Next, we discuss how firms use horizontal, vertical, and related types of acquisitions

to increase their market power.

Horizontal Acquisitions

The acquisition of a company competing in the same industry as the acquiring firm is a

horizontal acquisition. Horizontal acquisitions increase a firm’s market power by exploit-

ing cost-based and revenue-based synergies.

For example, National Australia Bank Ltd.

recently acquired the wealth-management assets from Aviva PLC’s Australian business.

A company spokesman said that the acquisition would enhance National Australia’s

“… offering in key wealth-management segments including insurance and investment

platforms, adding scale, efficiency and new capabilities to our operations.”

Toys “R”

Us Inc.’s acquisition of specialty toy retailer FAO Schwarz is another example of a hori-

zontal acquisition. Toys “R” Us officials indicated that they intended to use their firm’s

“… buying clout to offer a slightly broader appeal to FAO’s toy offerings …”

and to

reduce the price FAO was paying to buy products for its stores.

Research suggests that horizontal acquisitions result in higher performance when

the firms have similar characteristics,

such as strategy, managerial styles, and resource

191

Chapter 7: Merger and Acquisition Strategies

allocation patterns. Similarities in

these characteristics support efforts

to integrate the acquiring and the

acquired firm. The similarity in the

strategies they use should facilitate

the integration of National Australia’s

and Aviva’s wealth-management

assets. Toys “R” Us and FAO Schwarz

share similar product lines and allo-

cate their resources similarly to buy

and sell their products. Horizontal

acquisitions are often most effective

when the acquiring firm integrates

the acquired firm’s assets with its own

assets, but only after evaluating and

divesting excess capacity and assets

that do not complement the newly

combined firm’s core competencies.

Vertical Acquisitions

A vertical acquisition refers to a firm acquiring a supplier or distributor of one or more

of its goods or services.

Through a vertical acquisition, the newly formed firm controls

additional parts of the value chain (see Chapters 3 and 6),

which is how vertical acquisi-

tions lead to increased market power.

CVS/Caremark, a firm that was formed as a result of a transaction completed in

2007, is a product of a vertical acquisition. In 2007, CVS Corporation (a retail phar-

macy) acquired Caremark Rx, Inc. (a PBM or pharmacy benefits manager) to create

CVS/Caremark, which is the largest integrated pharmacy services provider in the United

States. In the firm’s words: “Payers and patients count on CVS/Caremark for a broad

range of services, from managing pharmacy benefits to filling prescriptions by mail or

offering clinical expertise.”

CVS/Caremark controls multiple parts of the value chain

allowing it to use the size of its purchases to gain price concessions from those selling

medicines and related products to it.

Related Acquisitions

Acquiring a firm in a highly related industry is called a related acquisition. Through a

related acquisition, firms seek to create value through the synergy that can be generated

by integrating some of their resources and capabilities. For example, Boeing recently

acquired eXMeritus Inc., a company providing hardware and software to federal govern-

ment and law enforcement agencies. eXMeritus’s products are intended to help agen-

cies securely share information across classified and unclassified networks and systems.

eXMeritus is operating as part of Boeing’s Integrated Defense Systems Network and

Space Systems business unit. This related acquisition facilitates Boeing’s intention of

expanding its presence in the cyber and intelligence markets—markets that are related to

other aspects of the firm’s Integrated Defense Systems operations.

Sometimes, firms fail to create value through a related acquisition. This is the case

for FAO Schwarz’s recent acquisition of Best Co., a fashion-oriented children’s clothing

company. The economic downturn that started around 2007 made it extremely difficult

for FAO Schwarz to generate the type of operational synergies it expected to accrue

through this related acquisition. Indeed, acquiring Best Co. weakened FAO, making it a

target for Toys “R” Us as a horizontal acquisition.

Horizontal, vertical, and related acquisitions that firms complete to increase their

market power are subject to regulatory review as well as to analysis by financial mar-

kets.

For example, Procter & Gamble (P&G) completed a horizontal acquisition

191

Toys “R” Us pursued an

aggressive horizontal

acquisitions strategy in

2009, with the acquisi-

tion of several small on-

line toy retailers in early

spring, FAO Schwarz in

May, and the bankrupt

KB Toys in the Fall.

AP Photo/Eric Landwehr

Martin Sasse/laif/Redux Pictures

192

Part 2: Strategic Actions: Strategy Formulation

of Gillette Co. in 2006. In announcing the transaction, P&G noted that integrating

Gillette into P&G’s operations would result in between $1 and $1.2 billion in annual

cost synergies and a 1 percent incremental annual sales growth from revenue syner-

gies for the first three years following the acquisition. However, before being finalized,

this acquisition was subjected to a significant amount of government scrutiny as well

as close examination by financial analysts. Ultimately, P&G had to sell off several busi-

nesses to gain the Federal Trade Commission’s approval to acquire Gillette.

Thus,

firms seeking growth and market power through acquisitions must understand the

political/legal segment of the general environment (see Chapter 2) in order to success-

fully use an acquisition strategy.

Overcoming Entry Barriers

Barriers to entry (introduced in Chapter 2) are factors associated with a market or

with the firms currently operating in it that increase the expense and difficulty new

firms encounter when trying to enter that particular market. For example, well-

established competitors may have economies of scale in the manufacture or service

of their products. In addition, enduring relationships with customers often create

product loyalties that are difficult for new entrants to overcome. When facing dif-

ferentiated products, new entrants typically must spend considerable resources to

advertise their products and may find it necessary to sell at prices below competitors’

to entice new customers.

Facing the entry barriers that economies of scale and differentiated products create, a

new entrant may find acquiring an established company to be more effective than enter-

ing the market as a competitor offering a product that is unfamiliar to current buyers. In

fact, the higher the barriers to market entry, the greater the probability that a firm will

acquire an existing firm to overcome them.

As this discussion suggests, a key advantage of using an acquisition strategy to over-

come entry barriers is that the acquiring firm gains immediate access to a market. This

advantage can be particularly attractive for firms seeking to overcome entry barriers

associated with entering international markets.

Large multinational corporations from

developed economies seek to enter emerging economies such as Brazil, Russia, India, and

China (BRIC) because they are among the fastest-growing economies in the world.

discussed next, completing a cross-border acquisition of a local target allows a firm to

quickly enter fast-growing economies such as these.

Cross-Border Acquisitions

Acquisitions made between companies with headquarters in different countries are called

cross-border acquisitions.

The purchase of U.K. carmakers Jaguar and Land Rover by

India’s Tata Motors is an example of a cross-border acquisition. We discuss this acquisition

further later in this chapter.

We noted in the Opening Case that global M&A activity declined in the recent

global financial crisis. The declines continued throughout the first half of 2009 largely

because “… shrinking economies, volatile markets and scarce debt hammered corporate

confidence.”

This decline was in stark contrast to the significant increase in cross-

border M&A activity during the 1990s. Nonetheless, as explained in the Opening Case,

cross-border acquisitions remain popular as a viable path to firm growth and strategic

competitiveness.

There are other interesting changes taking place in terms of cross-border acquisition

activity. Historically, North American and European companies were the most active

acquirers of companies outside their domestic markets. However, the current global com-

petitive landscape is one in which firms from other nations may use an acquisition strat-

egy more frequently than do their counterparts in North America and Europe. In this

regard, some believe that “… the next wave of cross-border M&A may be led out of Asia.

Chinese companies, in particular, are well positioned for cross-border acquisitions.

Relative to their overseas peers, Chinese corporates are well capitalized with strong

balance sheets and cash reserves.”

In the Strategic Focus, we describe recent cross-

border acquisitions some Chinese companies have completed or are evaluating. As you

will see, the acquisitions we discuss involve natural resource companies and many are

horizontal acquisitions through which the acquiring companies seek to increase their

market power.

Firms headquartered in India are also completing more cross-border acquisitions

than in the past. The weakening U.S. dollar and more favorable government policies

toward cross-border acquisitions are supporting Indian companies’ desire to rapidly

become “global powerhouses.”

In addition to rapid market entry, Indian companies

typically seek access to product innovation capabilities and new brands and distribution

channels when acquiring firms outside their domestic market.

Firms using an acquisition strategy to complete cross-border acquisitions should

understand that these transactions are not risk free. For example, firms seeking to

acquire companies in China must recognize that “… China remains a challenging

environment for foreign investors. Cultural, regulatory, due diligence, and legal

obstacles make acquisitions in China risky and difficult.”

Thus, firms must carefully

study the risks as well as the potential benefits when contemplating cross-border

acquisitions.

Cost of New Product Development and

Increased Speed to Market

Developing new products internally and successfully introducing them into the market-

place often requires significant investment of a firm’s resources, including time, making

it difficult to quickly earn a profitable return.

Because an estimated 88 percent of inno-

vations fail to achieve adequate returns, firm managers are also concerned with achieving

adequate returns from the capital invested to develop and commercialize new products.

Potentially contributing to these less-than-desirable rates of return is the successful imi-

tation of approximately 60 percent of innovations within four years after the patents

are obtained. These types of outcomes may lead managers to perceive internal product

development as a high-risk activity.

Acquisitions are another means a firm can use to gain access to new products and to

current products that are new to the firm. Compared with internal product development

processes, acquisitions provide more predictable returns as well as faster market entry.

Returns are more predictable because the performance of the acquired firm’s products

can be assessed prior to completing the acquisition.

Recently, America Online (AOL) acquired two online media companies, Patch Media

Corp. and Going Inc. AOL acquired these firms to move more rapidly into the relatively

fast-growing local online and advertising market. Patch operates Web sites to help local

communities publish news and information while Going makes it possible for users to

share information about local events. Access to these new products and services supports

AOL’s other products in the local online and advertising market space such as MapQuest

and social networking site Bebo.

rn m

about

how the recent

economic crisis

han

ed the cross-

er ac

uisition

env

ronment.

ww.cen

e.com

management

hitt

TRATEG

HT N

Chapter 7: Merger and Acquisition Strategies

193

Taking advantage of depressed prices for oil

and gas assets and through the access to credit

in their home country, Chinese state-owned

companies have begun to use acquisitions as

the path to securing “the resources needed to

power China’s growing economy” and to secure

access to energy in future years. The belief that

the recent global financial crisis has created an “unmatched buying opportunity” is also driving

Chinese firms to acquire companies to gain access to their assets and to increase their

market power.

The pace of Chinese firms’ cross-border acquisitions quickened in 2009. By mid-2009,

Chinese companies had completed 10 transactions in the oil and gas space. In contrast,

these firms completed only 14 transactions in this space in all of 2008. Moreover, if

outstanding bids were accepted by target companies, the amount Chinese firms will have

spent on acquisitions would be 80 percent greater than the amount spent previously on a

year-to-year basis.

Completed in mid-2009, state-owned Sinopec Group’s acquisition of oil exploration

company Addax Petroleum Corp. for $8.27 billion Canadian dollars was at the time

the largest cross-border acquisition by a Chinese company. Calling the acquisition a

“transformational transaction” that would accelerate its international growth, Sinopec paid a

16 percent premium for Addax. Based in Switzerland

and listed in London and Toronto, Addax is one

of the world’s largest independent oil producers

in West Africa and the Middle East on the basis of

volume. Around the same time, CNOCC, China’s top

offshore oil and gas producer, hired Goldman Sachs

to advise it on bidding to acquire a stake in Kosmos

Energy, an Africa-focused oil and gas exploration

company. CNOCC hired an investment advisory

firm in anticipation of a bidding war breaking out for

Kosmos, largely because of the attractiveness of the

firm’s assets.

Analysts studying these acquisitions and others

that likely will be completed conclude that Chinese

energy companies are becoming more confident in

their ability to create value and gain market power

through acquisitions. Business writers describe this

confidence as follows: “… deals like the Addax

acquisition show (that) they are gradually growing

into international oil companies, capable of striking

high-profile, cross-border deals. They are even

expanding into countries, such as Syria, deemed too

risky by Western oil companies.”

But not all of the cross-border acquisitions attempted by Chinese companies have been

successful. For example, Anglo-American mining giant Rio Tinto Ltd. rejected Aluminum

Corp. of China’s (Chinalco) $19.5 billion bid to buy 18 percent of the company. Rio was

attractive to Chinalco in that at the time, it was the world’s third-largest miner and owned

rich iron-ore and copper mines in locations throughout the world, including major facilities in

THE INCREASING USE OF

ACQUISITION STRATEGIES

BY CHINESE FIRMS AS

A MEANS OF GAINING

MARKET POWER IN A

PARTICULAR INDUSTRY

The 2009 acquisition of Addax

Petroleum Corp. with its holdings in

Africa and the Middle East by the

state-owned Sinopec Group

represented at the time the largest

Chinese cross-border oil and gas

acquisition in history.

AP Photo/Imaginechina

Australia. This acquisition would have given Chinalco a direct stake in mining assets—assets

that were important to China’s growth. In particular, iron ore is a crucial ingredient in

China’s steelmaking operations. Although disappointing, the rejection by Rio Tinto was not

expected to slow China’s commitment to allow its state-owned companies to pursue cross-

border acquisitions as a means of improving their competitiveness in the global economy

and as a means of gaining ownership of natural resources the nation believes are vital to its

long-term growth.

Sources: 2009, Is China Inc. overpaying in its merger deals? Wall Street Journal Online, http://www.wsj.com, June 25;

R. Carew, 2009, Chinalco acts to preserve its stake in Rio Tinto, Wall Street Journal Online, http://www.wsj.com, July 1;

G. Chazan & S. Oster, 2009, Sinopec pact for Addax boosts China’s buying binge, Wall Street Journal Online, http://

www.wsj.com, June 25; E. Fry, 2009, Chinalco buys $1.5 bn Rio Tinto shares, Financial Times Online, http://www.ft.com,

July 2; K. Maxwell, 2009, Shinsei and Aozora still talking, Wall Street Journal Online, http://www.wsj.com, June 26; S.

Tucker, 2009, CNOCC considers Kosmos stake bid, Financial Times Online, http://www.ft.com, June 20.

A number of pharmaceutical firms use an acquisition strategy because of the cost of

new product development. Acquisitions can enable firms to enter markets quickly and to

increase the predictability of returns on their investments. To expand on these points, we

discuss Pfizer’s recently announced horizontal acquisition of Wyeth in the Strategic Focus.

Lower Risk Compared to Developing

New Products

Because the outcomes of an acquisition can be estimated more easily and accurately than

the outcomes of an internal product development process, managers may view acquisi-

tions as being less risky.

However, firms should exercise caution when using acquisitions

to reduce their risks relative to the risks the firm incurs when developing new products

internally. Indeed, even though research suggests acquisition strategies are a common

means of avoiding risky internal ventures (and therefore risky R&D investments), acquisi-

tions may also become a substitute for innovation. Accordingly, acquisitions should always

be strategic rather than defensive in nature. Thus, Pfizer’s acquisition of Wyeth should be

driven by strategic factors (e.g., cost and revenue synergies) instead of by defensive reasons

(e.g., to gain sales revenue in the short term that will compensate for the revenue that will

be lost when Lipitor goes off patent). Moreover, Pfizer should not reduce its emphasis on

increasing the productivity from its R&D expenditures as a result of acquiring Wyeth.

Increased Diversification

Acquisitions are also used to diversify firms. Based on experience and the insights resulting

from it, firms typically find it easier to develop and introduce new products in markets they

are currently serving. In contrast, it is difficult for companies to develop products that dif-

fer from their current lines for markets in which they lack experience.

Thus, it is relatively

uncommon for a firm to develop new products internally to diversify its product lines.

Cisco Systems is an example of a firm that uses acquisitions to become more diversified.

Historically, these acquisitions have helped the firm build its network components busi-

ness that is focused on producing hardware. Recently, however, Cisco purchased IronPort

Systems Inc., a company focused on producing security software for networks. This acquisi-

tion will help Cisco diversify its operations beyond its original expertise in network hardware

and basic software. Cisco previously acquired technology in the security area through its

purchase of Riverhead Networks Inc., Protego Networks Inc., and Perfigo Inc. However,

the IronPort deal provides software service in networks that can help guard against spam

and viruses that travel through e-mail and Web-based traffic.

In 2009, Cisco IronPort

announced its “… new managed, hosted and hybrid hosted e-mail security systems that

provide the industry’s most versatile set of e-mail protection offerings.”

Thus, the IronPort

acquisition seems to be successful in terms of helping Cisco diversify its operations in ways

that create value.

Pharmaceutical companies allocate significant

amounts of money to research and

development (R&D) in efforts to successfully

develop new drugs. Pfizer Inc., for example,

spends 15 percent of its sales revenue on R&D.

As is the case for most if not all of its major competitors, Pfizer is committed to upholding

the highest ethical standards when engaging in R&D. According to Pfizer, the firm is

“… committed to the safety of patients who take part in our trials and upholds the highest

ethical standards in all of (its) research initiatives.”

In the words of a scholar who studies innovation: “R&D dollars by definition lead to

uncertain outcomes.” Because of the high levels of uncertainty associated with efforts to

develop products internally, a number of pharmaceutical companies use acquisitions to gain

access to new products and to a target firm’s capabilities. At this time, some believe that

the acquisitions taking place among these firms are “… reconfiguring the entire

pharmaceutical sector.”

Announced in early 2009, Pfizer’s horizontal acquisition of Wyeth for roughly $68 billion was

the largest transaction in the pharmaceutical industry in almost a decade. The purchase price

meant that Pfizer would pay a premium of approximately 29 percent to acquire Wyeth. As a

horizontal acquisition, this price suggested that Pfizer felt that the transaction would result in cost

and revenue synergies that at least equaled the amount of the premium it was willing to pay.

Why did Pfizer conclude that this acquisition was

in the best interests of its stakeholders—including its

shareholders? A key reason was that Wyeth had been

investing heavily in biotechnology and vaccines for

about three decades. In fact, Wyeth had become the

third-largest biotechnology company behind Amgen

Inc. and Genentech Inc. Pfizer wanted to gain access

to the new products that might flow from Wyeth’s

biotechnology-oriented R&D investments. Equally

important is the contribution Wyeth would make to

Pfizer’s sales revenue—revenue that was expected to

decline significantly after November 2011 when its

hugely successful Lipitor drug (a drug for patients to

control their high cholesterol) is scheduled to come off

patent. The impact of generic drugs being produced

to compete against Lipitor was potentially huge for

Pfizer in that this drug alone generates about

25 percent of the firm’s total revenue.

Analysts’ reactions to this acquisition were

mixed to negative. Some said that the core

problem is that although Wyeth’s sales revenue

would help Pfizer replace the revenue it will lose

after Lipitor goes off patent, it does not deal

with the fact that Pfizer is struggling to develop new products in-house. One analyst said

that “Pfizer is spending $7.5 billion a year in research and producing almost nothing and

now it has to buy Wyeth. If its pipeline were producing it wouldn’t need to buy Wyeth.”

Evidence suggests that acquisitions in the pharmaceutical industry do tend to generate

cost savings through operational synergies. Accordingly, Pfizer’s intended acquisition of

Wyeth may achieve one of the benefits of a horizontal acquisition. Simultaneously

PFIZER’S PROPOSED

ACQUISITION OF WYETH:

WILL THIS ACQUISITION

BE SUCCESSFUL?

Libby Welch/Alamy

With the patent on Lipitor due to expire in

2011 and generic competitors lining up,

Pfizer’s acquisition of Wyeth and its

pipeline of new products could help

replace anticipated lost revenue.

197

Acquisition strategies can be used to support use of both unrelated and related diversi-

fication strategies (see Chapter 6).

For example, United Technologies Corp. (UTC) uses

acquisitions as the foundation for implementing its unrelated diversification strategy.

Since the mid-1970s it has been building a portfolio of stable and noncyclical businesses

including Otis Elevator Co. (elevators, escalators, and moving walkways) and Carrier

Corporation (heating and air conditioning systems) in order to reduce its dependence on

the volatile aerospace industry. Pratt & Whitney (aircraft engines), Hamilton Sundstrand

(aerospace and industrial systems), Sikorsky (helicopters), UTC Fire & Security (fire

safety and security products and services), and UTC Power (fuel cells and power sys-

tems) are the other businesses in which UTC competes as a result of using its acquisition

strategy. While each business UTC acquires manufactures industrial and/or commercial

products, many have a relatively low focus on technology (e.g., elevators, air condition-

ers, and security systems).

In contrast to UTC, Procter & Gamble (P&G) uses acquisi-

tions to implement its related diversification strategy. Beauty, Health & Well-Being, and

Household Care are P&G’s core business segments. Gillette’s products are included in

the Beauty segment, where they are related to other products in this segment such as

cosmetics, hair care, and skin care. As noted earlier in the chapter, P&G completed a

horizontal acquisition of Gillette in 2006.

Firms using acquisition strategies should be aware that in general, the more related

the acquired firm is to the acquiring firm, the greater is the probability the acquisition

will be successful.

Thus, horizontal acquisitions and related acquisitions tend to con-

tribute more to the firm’s strategic competitiveness than do acquisitions of companies

operating in product markets that are quite different from those in which the acquiring

firm competes.

Reshaping the Firm’s Competitive Scope

As discussed in Chapter 2, the intensity of competitive rivalry is an industry characteris-

tic that affects the firm’s profitability.

To reduce the negative effect of an intense rivalry

on their financial performance, firms may use acquisitions to lessen their dependence on

one or more products or markets. Reducing a company’s dependence on specific markets

shapes the firm’s competitive scope.

Each time UTC enters a new business (such as UTC Power, the firm’s latest busi-

ness segment), the corporation reshapes its competitive scope. In a more subtle manner,

P&G’s acquisition of Gillette reshaped its competitive scope by giving P&G a stron-

ger presence in some products for whom men are the target market. By merging their

operations, Towers Perrin and Watson Wyatt reshaped the scope of their formerly inde-

pendent firms’ operations in that Towers was stronger in health care consulting while

Watson Wyatt was stronger in pension consulting. Thus, using an acquisition strategy

reshaped the competitive scope of each of these firms.

Learning and Developing New Capabilities

Firms sometimes complete acquisitions to gain access to capabilities they lack. For exam-

ple, acquisitions may be used to acquire a special technological capability. Research shows

that firms can broaden their knowledge base and reduce inertia through acquisitions.

though, Pfizer seeks to rely on Wyeth’s capabilities in the biotechnology space to develop

new products that the newly formed firm can quickly introduce to the market.

Sources: 2009, Pfizer’s acquisition of Wyeth brings scale but will fail to deliver sustainable sales growth, Trading Markets.

com, http://www.tradingmarkets.com, January 28; C. Arnst, 2009, The drug mergers’ harsh side effects, BusinessWeek

Online, http://www.businessweek.com, March 12; R. Jana, 2009, Do ideas cost too much? BusinessWeek, April 20,

46–58; J. Jannarone, 2009, Pfizer treatment is no cure, Wall Street Journal Online, http://www.wsj.com, January 24; S.

Pettyprice, T. Randall, & Z. Mider, 2009, Pfizer’s $68 billion Wyeth deal eases Lipitor loss, Bloomberg.com, http://www

.bloomberg.com, January 26.